June 18, 2013
Psychological Pricing Strategy: Where’s Your Head At?

Have you ever gone shopping and walked out of the store knowing that you just blew your budget? Come on, you can admit it; it’s happened to everyone. Would you feel better if I told you it wasn’t your fault? Well, it’s true...sort of. Through a variety of psychological pricing strategies, stores are specifically designed to encourage you to spend more than you intend.

The techniques that retail stores use can also be very effective when applied to pricing in other industries. Let’s dive deeper into four of the most popular ones that you can use to help increase your sales and hopefully avoid overspending at the mall ever again...and just for context - it's more than simply ending your prices in the number "9".

1. Artificial Time Constraints  

If you’ve been to any retail establishment in the past few months, I almost guarantee that you've seen some form of a sales sign depicting "1 day only sales!" where everything is "50% off!!" If we had more time, we'd add in more exclamation points. Snarkiness aside, there always seems to be this urgency around these sales, which ironically happen every weekend in some fashion. 

We’re going to let you in on a little secret: The sales are always going to be there. Don’t believe us? Look at how well JCPenny performed when they took them away.

Pricing Strategy

These “1-Day only” signs are known as artificial time constraints. Stores place these restrictions on their sales because they act as catalysts for consumers to spend. If potential customers believe that the sales are only temporary, they’re more likely to make their purchases today, rather than next week. Consumers are afraid of missing out on such an obvious deal, so they make the purchase in order to avoid this potential feeling of regret or missing out. Plus, they’ll feel peer pressured to buy after seeing all of their fellow shoppers take advantage of this bargain.

There's great power in creating artificial demand. You can take advantage of this psychological fear when you’re selling your own products, from shoes to enterprise software. Reverse the sales paradigm by branding your product as an exclusive, must-have item, and convince potential customers to sell you on why they’re a good fit for your product or service. Essentially, go back to your high school dating days and play hard to get. By doing so, you’ll create this urgency and fear in your prospects that they’re missing out on not only the next big product or trend, but that product at a great price. Be careful though, don't go too deep onto the discount pricing wagon. You want to make sure this lever reinforces, not deteriorates, your brand. 

2. Charm Pricing

Charm pricing is the official (read fancy) name for all those 9’s that you see at the end of prices in your local stores. Studies done by researchers at MIT and the University of Chicago have proven that prices ending in 9 create increased customer demand for products. This psychological phenomena is driven by the fact that we read from left to right, so when we encounter a new price at $1.99, we see the 1 first and perceive the price to be closer to $1.00 than it is to $2.00. In essence, ending your price in a 9 convinces customers that you’re offering a great deal.

Feel free to take advantage of this fact in your pricing. If your price is originally $100, try selling it for $99 and see if there is a difference in your sales. NOTE: This is different from A/B testing to find your pricing, as here you already know your optimal price point and are using A/B testing to find the optimal design of your pricing page.

Pricing Strategy

photo credit: EJP Photo

The prevalence of charm pricing has created the opposite effect as well. While prices ending in 9 connote a “value price”, prices ending in 0 now connote a “prestigious price.” So, if you’re selling a “high-class” product, like a diamond ring, you might be better served ending your price with a 0 to give your customers the impression that they’re paying for something that is expensive and worthwhile. For a great example take a look at most of the sales on Gilt Groupe's flash sales - all of the before prices will end in 0s or 5s while the after prices will end in 7s, 8s, and 9s. 

3. Innumeracy

Which do you think is a better deal? “Buy one get one free” or “50% off a two items?” According to a study done by researchers at the University of Minnesota, most people would prefer the first option, even though the two options are identical (buying two items at 50% off is the same as paying full price for one and getting the second free).

Pricing Software

photo credit: Generation X-Ray

This phenomenon is known as innumeracy, where consumers are unable to recognize or understand fundamental math principles as they apply to everyday life. (Those high school math classes are coming back to haunt you now.) Other ways that innumeracy appears in pricing include double discounting, coupon design, and percentage pumping. These topics are covered in more detail in our post on innumeracy.  

4. Price Appearance

The design of your prices can also have a tremendous impact on how customers perceive the value of your product. Next time you go to a fancy restaurant, look at the prices. Most likely they will be in a smaller font and won’t have the added zeroes at the end. They’ll look like “19”, instead of “$19.00”.

There’s a reason for this type of design. Longer prices appear to be more expensive for consumers than shorter prices, even if they represent the same number. This is because subconsciously, the longer prices take more time to read. This effect is compounded by the use of a “$” sign for prices. Not only does it make the price longer, but it also firmly relates the number to consumers’ wallets, which exacerbates the pain of parting with their hard earned cash. Similarly, prices with more syllables appear more expensive because consumers pronounce prices in their heads and it takes longer to recite extended numbers.

This is an easy tactic to employ for your pricing as well. Omit the “$” signs from your pricing and if you’re pricing at a whole number, forget the “.00” as well. If you’re trying to combine this tactic with charm pricing, consider making the “.99” very small compared to your main price.

Remember, these tactics are the last inch, not the whole foot

Your price is how you convey your value to your customers, and this communication hinges on your customers’ perceptions of your pricing, which you must measure using science, not your gut instinct. No amount of these psychological tips and tricks will make up for improperly set prices in the first place.

Also keep in mind, the decision to use these strategies is up to you. Some may see these techniques as taking advantage of consumers’ inherent mathematical and psychological weaknesses, while others may find them to be an essential part of everyday business.

Price Optimization Software

photo credit: "lapolab"

Regardless, the lesson here is to be transparent and open with your customers. The worst thing you can do is to leave your customers feeling tricked after they buy your product, because then, not only will they never return, but they will also tell everyone they know not to buy your products either (or even worse, post a bad review on Yelp!). All of that being said, look for these tactics being used on you as you venture out into the consumer world. Don't be fooled, and happy pricing!

To learn more about pricing specifics, check out our Pricing Strategy ebook, our Pricing Page Bootcamp, or learn more about our price optimization software. We're here to help!


Eric Yu is a software engineer at Price Intelligently.
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